MSN dealt a predictable, yet massive blow to the Australian search directory LookSmart yesterday with the announcement that MSN search will not renew an agreement to display results from the LookSmart directory. The current agreement which ends in mid January 2004, is LookSmart’s largest revenue stream, accounting for over 65% of the already beleaguered company’s $140Million annual income. LookSmart, which recently announced a move towards the paid-contextual advertising market, will almost certainly be fatally damaged by this move with LookSmart shares down 52 percent at $1.44 by the close of trading yesterday. Investors fled the company so quickly that trading on LookSmart’s stocks was closed shortly after the announcement.

Our analysis: MSN has dropped LookSmart for three main reasons:

1) First of all, LookSmart was entering the paid, contextual advertising sector, a market MSN wishes to dominate in the coming years. The last thing MSN needs is another rival to contend with on top of Yahoo and Google. By dropping LookSmart at this time, MSN is effectively consolidating its competition by eliminating the smallest.

2) Secondly, MSN doesn’t need to draw results LookSmart as it can now compile its own results from a mixture of Inktomi listings and sites spidered by the new MSNBot.

3) Thirdly, Microsoft needs to dominate the multi-billion dollar search market as its traditional markets are either flattening or shrinking as Linux romances the desktop market and Apple’s Unix driven Mac OS X continues it’s drive into the micro-product market. Microsoft’s signature product, Windows has proven to be a constant security risk as viruses and worms continue to penetrate and MS continues to issue patches, leading many IT decision makers towards UNIX and Linux based systems.

Microsoft is clearly aiming to take paid-advertising market share away from current industry leader Google and second runner Yahoo (Overture) however the imminent demise of LookSmart might actually come back to haunt MSN in a few months as LookSmart may have just become a more attractive take-over target for Google or Yahoo. LookSmart’s technology is sound and its newly announced paid-placement business model could generate revenues if LookSmart has learned to treat its customers with greater respect than they have in the past. While Yahoo has already been on a purchasing spree this year with the acquisition of AltaVista, AlltheWeb and Inktomi, Google has yet to take over another major search player, instead targeting smaller companies who’s technology could improve their current product.

Whatever happens to LookSmart in the coming months, MSN’s move has definitely moved the goalposts on the search engine playing field and escalated the business war between the big-three.

Yahoo! is ready to post its third quarter earnings report and stock analysts believe they will show their sixth consecutive profitable quarter (ending Sept. 30, 2003) with earnings above nine cents per share on revenues of $335.7 million. Analysts are already predicting a very strong fourth quarter for Yahoo with First Albany’s Youssef Squali, stating he expects to see Yahoo’s total search revenues jump by over 140% from last year’s numbers. This sudden rise is credited to the relationship between Yahoo and Overture, which is being purchased by Yahoo in the next few months. In Yahoo’s third quarter, Overture accounted for over 20% of Yahoo’s revenues. Yahoo watchers should keep their eyes on MSN in the coming months as MSN is expected to drop Overture search results in the near future in favor of their own paid-placement program which is expected to be announced early in the new year.

A great deal of information is leaking out of Redmond Washington this week as Microsoft’s spin-masters start the process of promoting the new search tool that will be incorporated in the new version of the Windows operating system currently code named, “Longhorn”. The new OS will blur the division between a computer’s hard-drive and the general Internet. The goal is to create the ultimate search tool, though with the number of features and tools being spoken of this week, it looks much like a Swiss-Army knife compared to the butter knife MSN currently provides. Read more…

Last Monday I received an Email from the Wall St. Journal. Since this is something that doesn’t happen every day, and, since the WSJ has already run the article with a quote from our correspondence, I thought it would be nice to share the email exchange with the world.

What will Microsoft do to increase its presence in the search engine industry? For a long time MSN has barely been a going concern in the search engine industry, but now with Google whispering about a ’04 IPO and Yahoo! buying Overture and Inktomi, there doesn’t seem to be many options left for the software giant. Here is some insight from MSN product manager Lisa Gurry:

“Lisa Gurry says the company plans to move aggressively to develop its in-house search expertise while continuing to rely on Yahoo as a supplier. ‘We will make the right investments to stay competitive in this space,’ says Gurry.” (USA Today)

Does “make the right investments” highlight a potential buyout of a known search service? This target has long been debated but the field of potential targets have narrowed considerably if we rule out a major buy of Google or Yahoo! by Microsoft.

“For the record, Gurry says Microsoft is not considering buying Yahoo or Google ‘at this time.'”

Who does that leave? Our money is on an acquisition of Teoma/AskJeeves. Teoma is really the only search engine that I can think of which has demonstrated the potential to innovate and maintain the clean search image that Google so quickly rose from. I suppose, however, that this prediction is a no-brainer since there is really very few to pick from.

Someone, somewhere is going to write a great business book about the search engine wars of 2003 however, their publishers will likely send it back for a rewrite because business books are not supposed to be more interesting and action packed than a Tom Clancy spy thriller. For a recap of previous events (and if you haven’t been keeping up, you’ll need it), please visit the StepForth search engine news site and check our back issues. By 2004, the search engine world will look very different than it does today, starting with Yahoo. Read more…